For the fourth time in as many years, strong inflows of foreign funds are driving up the Thai stock market. Between January 3 and February 8 this year, foreigners have been net buyers of Bt11.2bn of Thai stocks. During that time, the SET index has surged 16%, easily outperforming all the world’s major stock indices.

The previous three rallies in which foreigners were heavy buyers sputtered out after 1-3 months, leaving many local investors who failed to exit in time with substantial losses. While there is no guarantee that the current rally will not meet the same fate, there are plenty of reasons to believe that the SET latest uptick, which began in mid-November, will prove more resilient than previous stock market rebounds in the past four years. These reasons include:

1. The fall in interest rates, both at home and abroad, to historical lows
2. Improvements in corporate profitability due to debt restructuring, low interest rates and less competition in some sectors.
3. A strong revival in housing demand.
4. Stable politics, with relatively little infighting among government coalition parties and no major controversies or scandals threatening to topple the government.
5. Cheap valuations and high dividend yields for many Thai stocks
6. A series of measures by the Thaksin government to support the stock and property markets
7. Diversification of assets away from some major stock markets following the bursting of the tech bubble, the Enron scandal and persistent weakness of the Japanese economy,

Despite our optimism that foreign buying will help drive the SET index past the 400 mark before year-end, investors need to keep a close eye on foreign net buy/sell figures to ensure they are not left holding overpriced stocks when the market turns. The other pointer for a trend reversal is the performance of other Asian markets, particularly the other two TIP countries – the Philippines and Indonesia.

As our table above shows, Asian stocks markets tend to rise – and fall – together. The table also shows a striking correlation between the SET and the Indonesian and Philippine markets. Malaysia performed broadly in line with Thailand during 1998-9 but has substantially underperformed against the SET in the current rally and the one just over a year ago.

Although the current rally is liquidity-driven, the SET is back on foreign fund managers’ radar screens due to its recovery potential following five years of economic and corporate turbulence. The major threat to the rally is if economic indicators or corporate earnings fail to match investors’ growing expectations. This is a relatively low risk at this stage but earnings disappointments, particularly in the banking and finance sectors, have thwarted some of the SET’s previous attempts to mount a sustained recovery.

• Rally 1 (Jan 13–Feb 3 1998)